This blog is about macro-economics, financial markets and the world that has been pulled over your eyes to blind you from the truth.

— Neo: What truth?
— Morpheus: That you are a slave, Neo.

2011-03-12

Single Stocks: Green Mountain

Another post in the Single Stocks series and great overvaluations: Green Mountain Roasting Company. The company has currently achieved a great deal already: that of being the most highly valued company in the US.

The whole thing smells really bad, specially if you add the $1.1 billion in debt compared to the $33 million in cash, and the fact that the SEC is investigating their earnings...

Green Mountain Coffee Roasters Inc. has been growing so fast that acquirers looking to scoop up the largest U.S. seller of single-serve brewers would pay the highest valuation in America. The shares, which surged to a record this week on speculation of a partnership with Starbucks Corp., trade at 295 times cash flow, according to data compiled by Bloomberg. That’s more than any company in the Standard & Poor’s 500 Index. By sales, Green Mountain is costlier than eight of 10 U.S. stocks.

Chief Executive Officer Lawrence Blanford has used the Keurig business to almost quadruple Green Mountain’s revenue in the past three years, helping the company’s market value balloon more than sevenfold to $5.8 billion. While its 80 percent share of the U.S. single-cup coffee market makes Green Mountain a target for Coca-Cola Co. and Nestle SA, according to Janney Montgomery Scott LLC, it will still have to contend with Starbucks. CEO Howard Schultz said yesterday the world’s largest coffee-shop operator intends to compete directly for sales.

“People just can’t seem to drink enough coffee,” said John Carey, a Boston-based money manager at Pioneer Investments, which oversees about $250 billion. [...]

Pinheiro, who recommends buying Green Mountain, valued the coffee company at about $9 billion, or 56 percent more than its current market capitalization. At the level, a takeover would cost 47 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg.
[...]
With Starbucks’ Schultz damping speculation that it may partner with Green Mountain, the company also faces the prospect of increasing competition as patents on the Keurig K-Cup system are set to expire next year. Starbucks will win amid the change and innovation in the $4 billion single-serve market, the fastest growing in the global coffee industry, Schultz said.
[...]
Green Mountain spent $10.5 million more in cash on its operations than it brought in last year, even as it reported a 46 percent jump in net income to $79.5 million. The discrepancy was a result of a buildup in inventories and revenue booked for sales for which it had yet to receive payments, according to data compiled by Bloomberg.

The company had to restate earnings back to 2007 in part because of incorrect costs for K-Cup coffee pods and changes to the recognition of K-Cup royalties, Green Mountain said in a statement in November. The adjustment followed an investigation initiated by the U.S. Securities and Exchange Commission in September into how the company recognizes revenue.

The coffee merchant said in a Feb. 3 regulatory filing that it continues to cooperate fully with the SEC.

Green Mountain had $33 million in cash on hand as of Dec. 25, 2010, and about $1.1 billion in debt, Bloomberg data show.
[...]